As Benjamin Franklin
quipped, there are only two certainties in life – death and taxes.
In estate planning these twin perils come together in the form of "death
taxes" (more commonly referred to as "estate duty" by our
friends at the SARS). Many South Africans don't give much thought to estate
duty, some even unaware that a tax of 20% will be levied on their assets
(above the threshold) upon their death. This is a travesty as a few hours
of skilled estate planning can often reduce estate duty to nil, in a perfectly
legal and acceptable manner.

The most common form
of estate planning revolves around reducing the value of an individual’s
estate by making use of inter vivos trusts, interest free loans and donation
planning. A less common, but more difficult strategy, makes use of the
R 1.5 million abatement that every individual is entitled to in terms
of estate duty payable upon death. By using both the husband’s and
wife’s abatements a family can effectively transfer R 3 million
worth of assets to their heirs duty-free.

In practice this is
not always easy to achieve. This is because one can never be certain who
will pass away first – husband or wife. In terms of income tax legislation,
donations between spouses are free of any duty, so the obvious way to
get around this uncertainty is to split the assets of their combined estate
by way of donation between husband and wife. But here again we encounter
practical problems, as the recent property boom in South Africa has ensured
that many elderly resident’s major asset is their home. In most
cases the property is registered in one of the spouse’s names so
how does one split this principal asset? One could re-register the title
deeds so that both husband and wife own 50% of the property each, but
this would be subject to transfer duty and the high costs thereof are
often prohibitive. What is needed is another less costly way to “split”
the value of the property. Enter usufructs.

A usufruct grants
the holder the right of use of the property for the rest of their life
(or a defined period) but not ownership. The ownership still resides with
the original owner and their portion is now known as the bare dominium.
Although a usufruct has to be registered at the deeds office too, there
is no transfer duty, so all that is payable is the conveyancer’s
administration fee. This fee should not be more than about R 3000, which
is substantially less than the transfer fees of R 200 000 plus on a property
worth R 2.8 million. Due to the low cost it is also a lot easier to reverse
a usufruct if personal circumstances or legislation changes.

The actual mechanics
of how the usufruct reduces estate duty is rather complicated so the best
way to illustrate it is by way of an example. Let’s assume a family
where the husband is 73 and wife 65. They are married by antenuptual contract
and have a grown son of 40 years old and daughter age 38. The home property
is registered in the husband’s name and worth R 2.8 million. This
makes up the bulk of the couple’s assets, with the only other substantial
asset being the husband’s living annuity valued at R 1 million.
We will now assume two plans, one in which no estate planning has been
undertaken and plan two in which usufructs have been used in estate planning.
This second plan is the writer’s creation, but has been vetted by
both a Cape Town property attorney and leading estate planning experts
in Johannesburg. In both plan one and plan two, the scenarios of both
the wife and husband dying first will be considered.

PLAN ONE
At present the husband’s will leaves everything to the wife and
the wife’s will, everything to the husband. This is how the vast
majority of the wills in this country are structured. Lets look at what
happens upon death.

PLAN TWO
In this plan, the couple follow the advice of a reputable financial advisor
and do some thrifty estate planning making use of usufructs. The husband
registers a usufruct over the property as follows:

· The usufruct
will allow the wife immediate use of the property until her death.
· Upon the wife’s death, the usufruct will pass to the eldest
son for a period of one year.
· Upon completion of the one year, the usufruct will pass to the
family inter vivos trust for perpetuity.

In order to keep things
as simple as possible, the above calculations do not assume any growth
in asset values over the different periods. Motor vehicles and personal
effects have also been excluded from the calculation. Capital Gains tax
has also been left out, but our independent estate planning experts confirm
that the full calculations show that this plan is advantageous from a
CGT point of view too.

It can be very clearly
seen that a little planning, with a little cost, can result in your heirs
receiving huge savings in terms of estate duty. A complete plan like the
one above would cost in the region of R 10 000 (including the usufruct
and trust formation) and this would result in a saving of approximately
R 460 000.

As with all estate
planning a few caveats need to be mentioned. Firstly, if a financial institution
holds a bond over your property – they are very unlikely to agree
to the usufruct. You will need to settle your bond first. This should
not pose a problem to most retired couples, who should hopefully have
paid off their bonds by this stage.

continued/... The
second and less straightforward caveat is that the usufruct is often overlooked
as a real right. Should the couple experience marital problems and wish
to part ways, the wife (or husband) will keep the right. Which effectively
means that they could boot the other spouse out of the property even though
the other spouse was owner! One would imagine that most marriages that
have survived into retirement are in pretty good shape, but matters of
the heart are never as clear cut as matters of finance, so couples need
to be aware of this potential pitfall.

One of the reasons
that estate planning does not attract as much interest as it should is
that estate duty ultimately does not affect the deceased. And the reason
you probably haven’t heard about usufructs is because there are
not a lot of people out there peddling them. The commission on a R 460
000 life policy is far more rewarding than a few hours of administration
fees. So when it comes to usufructs, estate planners will need to get
pro-active and request specific advice from their financial advisors.
And, as the costs of estate duty are effectively borne by the heirs, it
is in the heir’s interests to become pro-active too. Indeed, it
can pay the heirs handsomely to instigate and bear the costs of the estate
planning themselves, as there are few other investments of R 10 000 around
that will net effective gains of R 450 000 with such a degree of certainty.comment